Option-implied Value-at-Risk and the cross-section of stock returns

Manuel Ammann () and Alexander Feser ()
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Manuel Ammann: University of St. Gallen
Alexander Feser: University of St. Gallen

Review of Derivatives Research, 2019, vol. 22, issue 3, No 4, 449-474

Abstract: Abstract Based on a novel rescaled option-implied Value-at-Risk (rVaR) measure, we show that option-implied information is priced differently depending on whether it is based on options with strikes close to the current price of the underlying or far-out-of-the-money options. If the rVaR is estimated from options close-to-the-money, i.e., the 50% rVaR, stocks with high risk outperform stocks with low risk by 0.60% per month, in line with downside risk-averse investors. In contrast, if rVaR is estimated from far-out-of-the-money options, i.e., the 90% rVaR, stocks with high risk underperform stocks with low risk by 0.42% per month, implying that stocks with low risk have higher returns in the cross-section of returns. Our results are consistent with investors who prefer reliable information over unreliable information and explain contradictory results of prior studies.

Keywords: Option-implied moments; Option-implied skewness; Downside risk (search for similar items in EconPapers)
JEL-codes: C14 G11 G12 G13 G14 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11147-019-09154-z

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